Deck 6: Firms and Production

Question 1

Limited liability is a benefit to

A)sole proprietorships.
B)partnerships.
C)corporations.
D)All of the above.

Answer 1

corporations.

Question 2

Economists typically assume that the owners of firms wish to

A)produce efficiently.
B)maximize sales revenues.
C)maximize profits.
D)All of the above.

Answer 2

maximize profits.

Question 3

Joey cuts grass during the summer.He rents a lawn mower from his dad.Which of the following statements best illustrates the difference between the short run and the long run for Joey?

A)Joey's friends say they will help him,but when he calls them,they say they have other things to do.
B)When Joey acquires more customers,he responds by working more hours.Next year,he will buy a lawn mower and split the work with his brother.
C)Some customers pay Joey immediately;others wait till the following week.
D)Joey has had to turn away some customers because he is already too busy.

Answer 3

When Joey acquires more customers,he responds by working more hours.Next year,he will buy a lawn mower and split the work with his brother.

Question 4

Efficient production occurs if a firm

A)cannot produce its current level of output with fewer inputs.
B)given the quantity of inputs,cannot produce more output.
C)maximizes profit.
D)All of the above.

Question 5

Explain why labor might not always be a variable input.

Question 6

With respect to production,the short run is best defined as a time period

A)lasting about six months.
B)lasting about two years.
C)in which all inputs are fixed.
D)in which at least one input is fixed.

Question 7

Homer's Donut Shoppe has the production function q = 10L +20L² - 5L³.The average product of labor is

A)AP = 10 + 20L - 5L²
B)AP = 10 + 40L - 15L²
C)AP = 10L
D)AP = 10 + 20L

Question 8

An organization that converts inputs (like Labor,Capital etc. )into output is called a

A)firm.
B)sole proprietorship.
C)corporation.
D)All of the above.

Question 9

The average product of labor is

A)the change in total product resulting from an extra unit of labor,holding other factors constant.
B)the ratio of output to the number of workers used to produce that output.
C)the amount of output that can be produced by a given amount of labor.
D)equal to the marginal product of labor when the average product is increasing.

Question 10

The length of the short run is the same for all firms.

Question 11

Joey cuts grass during the summer.He owns one lawn mower.For him,the short run is equal to

A)the amount of time it takes to acquire more customers.
B)the amount of time it takes to hire an additional employee.
C)the amount of time it takes to hire an additional employee and buy another lawn mower.
D)the amount of time it takes to mow one lawn.

Question 12

A firm where owners are usually not managers and not personally liable for the firm's debts is a

A)sole proprietorship.
B)general partnership.
C)corporation.
D)None of above.

Question 13

If the average product of labor equals the marginal product of labor,then

A)the average product of labor is at a maximum.
B)the marginal product of labor is at a maximum.
C)Both A and B above.
D)Neither A nor B above.

Question 14

In the long run,all factors of production are

A)variable.
B)fixed.
C)materials.
D)rented.

Question 15

For De Beers,the diamond company,diamond mines are ________ for their production.

A)capital services
B)labor services
C)materials
D)None of above.

Question 16

Which of the following statements best describes a production function?

A)the maximum profit generated from given levels of inputs
B)the maximum level of output generated from given levels of inputs
C)all levels of output that can be generated from given levels of inputs
D)all levels of inputs that could produce a given level of output

Question 17

Homer's Donut Shoppe has the production function q = 10L + 20L² - 5L³.The marginal product of labor is

A)MP = 10 + 40L -15L²
B)MP = 10 + 20L -5L²
C)MP = 10L
D)MP = 10 + 20L

Question 18

What do we mean by efficient production?

Question 19

Automobile manufacturers view the assembly-line workers as

A)capital services.
B)labor services.
C)materials.
D)None of above.

Question 20

Only corporations benefit from limited liability.

Question 21

Average productivity will fall as long as

A)marginal productivity is falling.
B)it exceeds marginal productivity.
C)it is less than marginal productivity.
D)the number of workers is increasing.

Question 22

Which situation is most likely to exhibit diminishing marginal returns to labor?

A)a factory that obtains a new machine for every new worker hired
B)a factory that hires more workers and never increases the amount of machinery
C)a factory that increases the amount of machinery and holds the number of worker constant
D)None of these situations will result in diminishing marginal returns to labor.

Question 23

Explain the difference between diminishing returns to labor and diminishing marginal returns to labor.

Question 24

The slope of the line from the origin to a given point on the curve equals

A)the increase in output.
B)the change in input divided by the change in output.
C)the average product of the input.
D)the marginal product of the input.

Question 25

A firm operating with diminishing total returns cannot be profit maximizing.

Question 26

At any given point on the curve,the slope of the total product curve always equals

A)the ratio of the marginal product and the average product.
B)the change in input divided by the change in output.
C)the average product of the input.
D)the marginal product of the input.

Question 27

When diminishing marginal returns set in,total product will

A)increase at an increasing speed.
B)increase at a decreasing speed.
C)decrease at an increasing speed.
D)decrease at a decreasing speed.

Question 28

Total product is

A)the change in total product resulting from an extra unit of labor,holding other factors constant.
B)the ratio of output to the number of workers used to produce that output.
C)the amount of output that can be produced by a given amount of labor.
D)equal to the marginal product of labor when the average product is increasing.

Question 29

The marginal product of labor is

A)the change in total product resulting from an extra unit of labor,holding other factors constant.
B)the ratio of output to the number of workers used to produce that output.
C)the amount of output that can be produced by a given amount of labor.
D)equal to the marginal product of labor when the average product is increasing.

Question 30

If marginal productivity is increasing,then total product is

A)increasing at an increasing speed.
B)increasing at a constant speed.
C)increasing at a decreasing speed.
D)decreasing at an increasing speed.

Question 31

If marginal productivity is decreasing as more labor is hired,then average productivity must be decreasing as well.

Question 32

Thomas Malthus' prediction of mass starvation resulting from diminishing marginal returns has not been fulfilled because

A)the law of diminishing marginal returns did not hold in this case.
B)Malthus ignored other factors like technological change.
C)relative to Malthus' day,a larger percentage of today's labor works in the agricultural sector.
D)All of the above.

Question 33

If the marginal product of labor is constant for all levels of output,then the average product of labor

A)is constant.
B)equals the marginal product of labor.
C)Both A and B above.
D)Either A or B above but not both.

Question 34

Which of the following statements best summarizes the law of diminishing marginal returns?

A)In the short run,as more labor is hired,output diminishes.
B)In the short run,as more labor is hired,output increases at a diminishing rate.
C)In the short run,the amount of labor a firm will hire diminishes as output increases.
D)As more labor is hired,the length of time that defines the short run diminishes.

Question 35

At low levels of production,marginal productivity of labor increases as labor increases.At high levels of production,marginal productivity of labor decreases as labor increases.Are these two statements contradictory? Explain.

Question 36

Each additional worker produces two extra units of output until the first three units are produced for some production function.After the third unit is produced each additional worker produces one extra unit of output.What are the total product of labor,average product of labor and marginal product of labor for the first five units of production associated with this production function?

Question 37

Joey cuts lawns during the summer.Let q equal the number of acres mowed per day,and let L equal the number of hours worked per day.Joey never works more than eight hours per day,and during that time his short-run production function is q = 0.2 ∗ L.Which of the following statements is FALSE?

A)Joey's marginal productivity equals his average productivity.
B)Joey's marginal productivity diminishes by 0.2 for each additional hour worked.
C)Joey's average productivity is constant.
D)Joey's marginal productivity is constant.

Question 38

The actual time length of the short run is determined by when diminishing marginal returns start.

Question 39

Total product is maximized where

A)average product is maximized.
B)marginal product is maximized.
C)average product is equal to 0.
D)marginal product is equal to 0.

Question 40

Were it not for the law of diminishing marginal returns,we could grow the world's food supply from a flowerpot.

Question 41

An isoquant represents levels of capital and labor that

A)have constant marginal productivity.
B)yield the same level of output.
C)incur the same total cost.
D)All of the above.

Question 42

In the above figure,Graph D with Capital on the vertical axis and Labor on the horizontal axis implies that

A)the marginal product of labor is increasing as more labor is employed.
B)the marginal product of labor is decreasing as more labor is employed.
C)the capital and labor are perfect substitutes.
D)capital and labor have to be employed in fixed proportions.

Question 43

Lectures in microeconomics can be delivered either by an instructor (labor)or a movie (capital)or any combination of both.Each minute of the instructor's time delivers the same amount of information as a minute of the movie.Which graph in the above figure best represents the isoquants for lectures in microeconomics when Capital per day is on the vertical axis and Labor per day is on the horizontal axis?

A)Graph A
B)Graph B
C)Graph C
D)Graph D

Question 44

Ed's building company has the following production function
q = 20L - L²
where q is the number of houses built and L is the quantity of labor Ed employs.
a.Derive the MP and AP.
b.For what values of L is the MP > 0? For what values of L is the MP diminishing?
c.Draw the MP and AP on a graph.

Question 45

The production function for hamburgers can be written as q = 0.1X + 0.1Y,where X is Canadian ground beef and Y is U.S.beef,both measured in pounds.Which graph in the figure best represents the isoquants for the hamburger production when U.S.ground beef is on the vertical axis and Canadian ground beef is on the horizontal axis?

A)Graph A
B)Graph B
C)Graph C
D)Graph D

Question 46

Isoquants that are downward-sloping straight lines imply that the inputs

A)are perfect substitutes.
B)are imperfect substitutes.
C)cannot be used together.
D)must be used together in a certain proportion.

Question 47

At Joey's Lawncutting Service,a lawn mower cannot cut grass without a laborer.A laborer cannot cut grass without a lawn mower.Which graph in the above figure best represents the isoquants for Joey's Lawncutting Service when Capital per day is on the vertical axis and Labor per day is on the horizontal axis?

A)Graph A
B)Graph B
C)Graph C
D)Graph D

Question 48

Suppose the production of paved roadways can be represented as q = L^0.5 + K^0.5.Which of the following statements is (are)TRUE?

A)Labor is subject to diminishing marginal productivity in the short run.
B)Labor and capital are imperfect substitutes.
C)The isoquants for paved roadways are convex.
D)All of the above.

Question 49

Blowdryer businessman Max Power is starting a new hairdryer business.Max estimates his production function to be q = KL^0.5.Max has 60 units of capital (K = 60).Derive Max's MP and AP of labor for the current level of capital.

Question 50

To say that isoquants are convex is to say that

A)the marginal rate of technical substitution falls as labor increases.
B)capital and labor are perfect substitutes.
C)labor,but not capital,is subject to the law of diminishing marginal returns.
D)there are constant returns to scale.

Question 51

Describe the relationship between marginal productivity and average productivity.Use calculus or a graph to support your answer.

Question 52

L-shaped isoquants imply that production requires that the inputs

A)are perfect substitutes.
B)are imperfect substitutes.
C)cannot be used together.
D)must be used together in a certain proportion.

Question 53

Consider the following short-run production function: q = 5
- 1/3
.At what level of L do diminishing marginal returns begin? At what level of L do diminishing returns begin?

Question 54

Which graph in the above figure represents the isoquants where,as the amount of labor used increases and the amount of capital used decreases,the marginal product of labor rises when Capital per day is on the vertical axis and Labor per day is on the horizontal axis?

A)Graph A
B)Graph B
C)Graph C
D)Graph D

Question 55

At Joey's Lawncutting Service,the production function is represented as: q = min(m,l),where q is the quantity of lawns mowed.The inputs are m,the lawn mower,and l,the laborer.Which graph in the above figure best represents the isoquants for Joey's Lawncutting Service when Capital per day is on the vertical axis and Labor per day is on the horizontal axis?

A)Graph A
B)Graph B
C)Graph C
D)Graph D

Question 56

Lectures in microeconomics can be delivered either by an instructor (labor)or a movie (capital)or any combination of both.Yet the it gets harder and harder to substitute more movies for an instructor the more movies are already used.Which graph in the above figure best represents the isoquants for lectures in microeconomics when Capital per day is on the vertical axis and Labor per day is on the horizontal axis?

A)Graph A
B)Graph B
C)Graph C
D)Graph D

Question 57

A small firm in Indonesia has the following estimated production function:
ln(q)= 10 + 2.6ln(L)- 0.4(ln(L))²
Derive the firm's marginal and average product of labor as functions of q and L.What is the elasticity of output with respect to labor?

Question 58

Isoquants that are downward-sloping straight lines exhibit

A)an increasing marginal rate of technical substitution.
B)a decreasing marginal rate of technical substitution.
C)a constant marginal rate of technical substitution.
D)a marginal rate of technical substitution that cannot be determined.

Question 59

One way to explain the convexity of isoquants is to say that

A)as labor increases and capital decreases,
rises while

Falls.
B)as labor increases and capital decreases,
falls while

rises.
C)as labor increases and capital decreases,
and

both fall.
D)as labor increases and capital decreases,
and

both rise.

Question 60

Suppose the production function for T-shirts can be represented as q = L^0.25 K^0.75.Show that the marginal productivity of labor diminishes in the short run.

Question 61

Let the production function be q = AL^aK^b.The function exhibits decreasing returns to scale if

A)a + b = 1.
B)a+ b > 1.
C)a + b < 1.
D)Cannot be determined with the information given.

Question 62

Mr.Roche purchases a firm that produces widgets by employing machines and workers.Each machine requires exactly three workers to operate.Without three workers,the machine will not work,and any additional worker above three will just stand there doing nothing.When operated this way,the machine produces 30 widgets an hour.Draw some isoquants for this technology and determine the production function.

Question 63

In Sewei's lawnmowing business,in order to produce each mowed lawn,Sewei must hire exactly one unit of capital (a lawnmower)and exactly one unit of labor.Describe the elasticity of substitution between labor and capital.

Question 64

If inputs into production cannot be substituted for each other but have to be employed in fixed proportions,isoquants are straight,downward-sloping lines.

Question 65

Find the Marginal Rate of Technical Substitution for the following production functions:
a.q = L^0.5 K^0.5
b.q = L^0.5 + K^0.5
c.q = min{K,L}
d.q = L + K

Question 66

Let the production function be q = AL^aK^b.Returns to scale are equal to

A)a ∗ b.
B)a + b.
C)L^a + K^b.
D)A ∗ L.

Question 67

Unlike indifference curves,isoquants can intersect.

Question 68

JC's music production company provides artists with studio time and a backing band to record with.In providing the rhythm track,JC can employ drum machines or drummers.Regardless of the quantity of output JC produces,he can substitute two drummers with one drum machine-drum machines tire out less quickly).Draw a few isoquant lines (with numbers)reflecting this production function for the rhythm track.Determine the function representing this production process.

Question 69

The steeper an isoquant is,

A)the greater is the marginal productivity of labor relative to that of capital.
B)the greater is the substitutability between capital and labor.
C)the greater is the need to keep capital and labor in fixed proportions.
D)the greater is the level of output.

Question 70

Let the production function be q = AL^aK^b.The function exhibits increasing returns to scale if

A)a + b = 1.
B)a + b > 1.
C)a + b < 1.
D)Cannot be determined with the information given.

Question 71

Returns to scale refers to the change in output when

A)all inputs increase proportionately.
B)labor increases holding all other inputs fixed.
C)capital equipment is doubled.
D)specialization improves.

Question 72

Decreasing returns to scale may occur as increasing the amount of inputs used

A)increases specialization.
B)always increases the amount of output produced.
C)may cause coordination difficulties.
D)increases efficiency.

Question 73

The marginal rate of technical substitution always equals

A)the slope of the total product curve.
B)the ratio of the marginal products of inputs.
C)the change in output due to a change in the amount of one input.
D)the distance between two isoquants.

Question 74

Suppose the production function for T-shirts can be represented as q = L^0.25 K^0.75.When
K = 1 and q = 2,what is the slope of the isoquant? If there is insufficient information to answer the question,describe what information is needed.

Question 75

Suppose the production function for T-shirts can be represented as q = L^0.25 K^0.75.Show that the isoquants for this function are convex.

Question 76

If the elasticity of substitution of a production function is equal to zero,then this production function is a

A)linear production function
B)fixed proportion production function
C)Cobb-Douglas production function
D)None of above.

Question 77

Justin's bank employs tellers and ATMs.Both are able to serve clients in the exact same way and therefore are perfect substitutes.Describe the elasticity of substitution between the two inputs.

Question 78

With capital on the vertical axis and labor on the horizontal axis,vertical isoquants imply that

A)capital and labor are perfect substitutes.
B)capital and labor must be used together in a certain proportion.
C)capital is not productive.
D)labor is not productive.

Question 79

The slope of an isoquant tells us

A)how much output increases when both inputs are increased.
B)the increase in MPL when capital increases.
C)the decrease in capital necessary to keep output constant when labor increases by one unit.
D)the decrease in capital necessary to keep MPL constant when labor increases by one unit.

Question 80

Suppose that additional units of capital affect the marginal productivity of labor.This is not unrealistic.Word processors increase the marginal productivity of secretaries.On the other hand,robotic equipment can completely replace a worker and,thereby,lower the marginal productivity of labor.Given this possibility,determine the conditions under which isoquants will not be convex (i.e. ,concave).